{"id":9926,"date":"2020-03-02T09:43:46","date_gmt":"2020-03-02T15:43:46","guid":{"rendered":"http:\/\/blog.uwsp.edu\/cps\/?p=9926"},"modified":"2020-03-02T09:51:48","modified_gmt":"2020-03-02T15:51:48","slug":"what-a-week-for-world-markets-and-coronavirus","status":"publish","type":"post","link":"https:\/\/blog.uwsp.edu\/cps\/2020\/03\/02\/what-a-week-for-world-markets-and-coronavirus\/","title":{"rendered":"What a week for world markets and coronavirus"},"content":{"rendered":"\n

What a week \u2013 global stock markets around the world<\/em> tanked as fears and health concerns increased over the coronavirus \u2013 including both the spreading of the virus and preparedness for the virus. Pick a country \u2013 Germany, Japan, France, Canada, Mexico, England, China, United States \u2013 all the markets were down significantly, generally 10% or more. <\/p>\n\n\n\n

The coronavirus\nhas created great uncertainty \u2013 in terms of both healthcare and the economy. In\nthe United States several companies, including Apple and Nike, have already\nexpressed that their supply chains have been disrupted as factories in China\nwere shutdown due to the virus. The coronavirus creates both supply and demand\nproblems. On the supply side, supply chains have been disrupted. U.S. companies\nhave not been able to source products – this affects costs, product\navailability, and ultimately increases prices. On the demand side, the\ncoronavirus has the potential impact of reducing personal consumption \u2013 the\ndriver of the U.S. economy. Spending on travel and leisure activities, higher\nprices resulting from supply chain interruptions, and the potential of rising\nunemployment resulting from reduced corporate profitability, all have the\npotential of derailing the driving force of economic growth \u2013 consumer\nspending. The big questions \u2013 how bad does the coronavirus get, and how\nnegative will its impact be on the health and economies around the world?<\/p>\n\n\n\n

The stock\nmarket is not the economy, but it reflects expectations of future corporate\nprofitability. Much, much uncertainty remains over the health and economic\nimpact of the coronavirus. However, stock markets around the world have tanked\nbecause of the expected impact on corporate earnings and the growing\nuncertainty over those earnings. There is also an impact on interest rates. In\ntimes of economic and financial market uncertainty, a \u201cflight to quality\u201d\ntypically occurs. The \u201cflight to quality\u201d refers to selling risky assets, like\nstocks, and investing in relatively safe securities like Treasury bonds \u2013 debt\nof the United States government. The increased demand for Treasury securities\npushes down yield (interest) rates. That occurred during the financial crisis\nof 2007-2009, and it has occurred again in 2020. The chart below shows how\nyield rates have changed since the start of the year across various maturities\nof Treasury securities. Except for the 3-month rate, yield rates across all\nmaturities have decreased since the start of the year.  <\/p>\n\n\n\n
Date<\/strong> <\/td>1 Mo<\/strong> <\/td>2 Mo<\/strong> <\/td>3 Mo<\/strong> <\/td>6 Mo<\/strong> <\/td>1 Yr<\/strong> <\/td>2 Yr<\/strong> <\/td>3 Yr<\/strong> <\/td>5 Yr<\/strong> <\/td>7 Yr<\/strong> <\/td>10 Yr<\/strong> <\/td>20 Yr<\/strong> <\/td>30 Yr<\/strong> <\/td><\/tr>
1\/2\/20 <\/td>1.53 <\/td>1.55 <\/td>1.54 <\/td>1.57 <\/td>1.56 <\/td>1.58 <\/td>1.59 <\/td>1.67 <\/td>1.79 <\/td>1.88 <\/td>2.19 <\/td>2.33 <\/td><\/tr>
2\/27\/20 <\/td>1.56 <\/td>1.53 <\/td>1.45 <\/td>1.33 <\/td>1.18 <\/td>1.11 <\/td>1.08 <\/td>1.11 <\/td>1.22 <\/td>1.30 <\/td>1.61 <\/td>1.79 <\/td><\/tr><\/tbody><\/table>\n\n\n\n

The incredibly\nlow level of interest rates creates another problem. The Federal Reserve, the\ncentral bank of the United States, strongly influences the overall level of\ninterest rates in the economy. Central banks can ease credit conditions and\nincrease the money supply \u2013 resulting in lower interest rates which may<\/em>\nstimulate economic growth. Generally, lower interest rates can boost economic growth by\nencouraging spending through lower borrowing costs for both consumers and\nfirms. However, if the Federal Reserve cuts interest rates in the current\nenvironment, the impact on the economy is highly questionable. The problem in\nthe current economy is the uncertainty over the coronavirus \u2013 not the level of\ninterest rates. If the Federal Reserve cuts interest rates further to try and\noffset the negative impacts of the coronavirus on the economy, it is highly\nquestionable if consumer and business spending will react significantly.<\/p>\n\n\n\n

During the recent financial crisis, after peaking in October 2007 the S&P 500 fell nearly 60% through March 2009. However, by April 2013, the stock market had fully recovered \u2013 reflecting the economic growth that had returned beginning in 2009. The market declines caused by the terrorist attacks (approximately 5%) in September 2001 were fully erased by the beginning of the next year. The ultimate impact of the coronavirus on the current economy, and financial markets, is yet to be determined. When those impacts can be quantified, market volatility will subside. Until those impacts can be quantified, the financial market ride will likely continue. For long-term investors, investing in the U.S. stock market is a bet on long-term economic growth and corporate profitability. Since 1926, the average<\/em> annual return on large company stocks has been approximately 11%. However, that is the average<\/em> return. Short-term, market volatility and stock market returns remain questionable as long as uncertainty remains over the outcome of the coronavirus on global health and economies. <\/p>\n\n\n\n

\"Kevin<\/figure>
\n

Kevin Bahr is a professor emeritus of finance and chief analyst of the Center for Business and Economic Insight<\/a> in the Sentry School of Business and Economics at the University of Wisconsin-Stevens Point. <\/p>\n<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

What a week \u2013 global stock markets around the world tanked as fears and health concerns increased over the coronavirus \u2013 including both the spreading of the virus and preparedness for the virus. Pick a country \u2013 Germany, Japan, France, Canada, Mexico, England, China, United States \u2013 all the markets were down significantly, generally 10% […]<\/p>\n","protected":false},"author":136,"featured_media":9757,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,527],"tags":[533,343,344],"_links":{"self":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9926"}],"collection":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/users\/136"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/comments?post=9926"}],"version-history":[{"count":2,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9926\/revisions"}],"predecessor-version":[{"id":9928,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/posts\/9926\/revisions\/9928"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media\/9757"}],"wp:attachment":[{"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/media?parent=9926"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/categories?post=9926"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.uwsp.edu\/cps\/wp-json\/wp\/v2\/tags?post=9926"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}